Marco Polo Group Advances Blockchain-Based Trade Finance Solution

Can
distributed ledgers be the next big thing in the trade finance industry? A
group of major international banks and their partners in the blockchain
ecosystem clearly think so, as they begin pilot operations for their Marco
Polo trade
finance initiative.

The State of Trade Finance

To
understand why the Marco Polo initiative was created, it’s worth assessing the current
state of the trade finance industry.

The trade
finance industry provides financing and financial safeguards for the
large-scale exchange of goods and services, usually between countries. When
products or services cross borders, banks, insurers, credit guarantors and
other types of companies ensure that importers and exporters have access to the
financing and guarantees that they need to do business.

Trade
finance is as old as international commerce. However, as the global economy has
changed in recent years due to new technologies, and with the fallout of the
2008 economic crash and other forces, the trade finance industry has been beset by new challenges.

These
include increased regulatory pressure, the threat of disruption within the
industry posed by digital startups to traditional banks, and the inability of
existing trade finance technology to keep pace with the demand for real-time,
low-margin trading.

Large
stakeholders in the trade finance industry are looking at the health of the
entire supply chain and are seeking new solutions that holistically address the
finance needs of large companies responsible for large supply chains as well as
up- and downstream buyers and suppliers.

The Marco Polo Initiative

With
these sorts of challenges in mind, the Marco Polo initiative uses distributed
ledger technology to manage data and enable smart contracts, with the goal of
making trade finance more secure, efficient and transparent.

The
initiative was launched in September 2017, and it was announced on February 21,
2018, that Marco Polo was ready to enter into a pilot phase, following the
successful completion of proof-of-concept operations.

TradeIX’s
TIX platform, a blockchain-based system of applications and tools for
trade finance, provides the software that will enable Marco Polo’s services.
The underlying blockchain is provided by R3’s Corda distributed ledger,
which is designed for the finance industry. Microsoft is a part of the
initiative, too, providing the cloud infrastructure that powers the services.

For now,
the Marco Polo project’s focus is on risk mitigation, payables finance and
receivables finance, according to a statement from the group. However, the
initiative hopes to expand during the current calendar year to “include
additional banks and third-party service providers, such as credit insurers,
ERP and logistics providers,” the statement said.

The banks
participating in the Marco Polo initiative see important opportunities for
making trade finance more efficient and reliable using blockchains and
distributed ledgers. Lasse Meholm, head of blockchain and distributed ledger strategy
at DNB, said in an interview that blockchain technology offers “a wide range of
advantages over traditional technology” for trade finance, including more stability
as a result of the distributed nature of nodes and data, as well as the
security provided by having a single source of truth in the blockchain.

He added
that, using the blockchain, “money becomes programmable, as smart contracts can
program payments depending on a large number of dependencies.” Smart contracts
enable banks “to create new services for our customers and improve the customer
journey,” he said.

Several
of the companies involved in the Marco Polo initiative already have significant
experience using blockchain technology to address other challenges in the
finance industry. Michael Vrontamitis, head of trade, Europe and Americas, at
Standard Chartered, told Distributed.com that “we are involved in a
number” of blockchain initiatives, adding that “our focus is on solving
problems for our clients rather than the technology itself. We worked with
one client, for example, with TradeIX and AIG to deliver a receivables solution
leveraging blockchain [technology], API and cloud technologies.”

Meholm said
that DNB is also involved in several blockchain-related projects, though not
all of them have been publicly disclosed to date. He also said that the bank
has “increased our focus and budget on blockchains and distributed ledgers over
the past six or eight months.”

Michael
Spitz, a blockchain specialist and CEO of the Main Incubator at Commerzbank,
said that his bank is active in Hyperledger, Ethereum and other blockchain
projects.

“Our
blockchain projects focus on different parts of the bank value chain,” he said,
“from securities issuance over cash on ledger/payments to trade finance.”

Spitz
added that in working with Marco Polo, Commerzbank’s “main objective is to
explore the benefits of distributed ledger technology for our trade finance
offer, so that we can create more sophisticated trade finance solutions with
focus on the open account market by connecting the physical and the financial
supply chains of our clients.”